Cairn India to merge into Vedanta in $2.3 bn all-share deal

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Mumbai | Updated: Jun 14, 2015 6:00 PM

Billionaire Anil Agarwal's group today announced merger of its cash-rich oil company Cairn India with parent Vedanta to cut debt at the struggling resources arm.

Cairn india vedantaCairn India has no debt, and cash needs have dwindled after investment programme was slashed by 60 per cent to USD 500 million for current year. (Reuters)

In move to cut debt at Anil Agarwal group, India’s largest private miner Vedanta Ltd will absorb oil firm Cairn India in a USD 2.3 billion all-share deal to create India’s largest diversified natural resources company.

Shareholders in Cairn India, the country’s top private oil producer, will get one ordinary share and 7.5 per cent redeemable preference share of Vedanta Ltd with a face value of Rs 10.

That implies a premium of 7.3 per cent to Cairn’s Friday closing price.

Vedanta will use Rs 16,867 crore cash lying with Cairn to pay off part of its Rs 77,752 crore debt.

Post-merger, London-listed parent Vedanta Resources Plc’s holding in Vedanta Ltd will drop to 50.1 per cent from 62.9 per cent.

“The merger is the second step in the series that started in 2013 towards simplification of the corporate structure,” Vedanta Ltd chief executive Tom Albanese told PTI in an interview.

Vedanta, previously known as Sesa Sterlite Ltd, in 2013 consolidated its iron ore mining business by merging Sesa Goa Ltd with Sterlite Industries (India) Ltd, which ran copper and aluminium businesses.

“This merger is about creating long term value that is not only good for Vedanta shareholders but also good, attractive and compelling for Cairn India shareholders,” he said.

The merger will help Cairn spread its risk from volatile oil business to other metals and commodities.

“I am of the belief that diversified producers have enjoyed better shareholder returns than pure plays. If you look at how global oil and gas business has really suffered because of oil prices (fall in 2014), it clearly demonstrates that diversified groups are better than pure plays. The merger derisks the business and stabilizes revenue stream,” he added.

The long-anticipated move would take Agarwal a step closer to achieving his ambition of building an India-integrated resources group in the mould of Rio Tinto or BHP Billiton.

The move needs approval of 50 per cent of minority shareholders of Cairn India, including its former parent Cairn Energy, which owns 9.8 per cent of total shares, and state-run insurance company LIC, which owns another 9 per cent.

When contacted, Cairn Energy spokesperson said, “We note the announcement and will assess whether the proposal is in the interests of Cairn Energy Plc as a shareholder in Cairn India Ltd in due course.”

“This is a good deal for Cairn shareholders,” Albanese said.

The transaction is targetted to be closed by March 31, 2016 and would need approval of both the stock exchanges, BSE and NSE, market regulator SEBI, High Court as well as Ministry of Petroleum and Natural Gas for transfer of Cairn India’s interest in oil and gas blocks like Barmer basin oil block in Rajasthan and Ravva oil and gas field in KG Basin to Vedanta Ltd.

Vedanta CFO D D Jalan said the cash at Cairn and debt at Vedanta have been duly considered in arriving at valuation and the swap ratio.

Albanese said the Cairn brand will be retained even after the merger and there will be no job cuts. “Cairn is a very strong brand locally and we intend to retain that,” he said.

Through the merger, Agarwal plans to use Rs 16,867 crore cash lying with Cairn to pay off part of Vedanta’s debt.

Cairn has no debt, and cash needs have dwindled after investment programme was slashed by 60 per cent to USD 500 million for current year.

Vedanta Ltd, India’s top producer of aluminum and copper, is nation’s second-most indebted metals company and its annual interest costs is nearly three times the London parent’s.

It has debt of Rs 77,752 crore, excluding a USD 1.25 billion inter-company loan from Cairn India. Cairn India is almost 60 per cent owned by Vedanta.

Cairn’s cash could have been funnelled to its parent through dividends, but that would incur taxes. It last year extended a low interest loan of USD 1.25 billion to Vedanta Ltd, a move that spooked investors about corporate governance.

The merger brings curtains down on a process that began when Vedanta bought a controlling stake in the Indian arm of Edinburgh-based Cairn Energy for USD 8.67 billion in 2011.

Agarwal had previously hinted that he aims to bring the businesses together.

In May, the group took a USD 6.6 billion impairment charge, largely on account of dip in crude oil prices.

Cairn India produces oil and gas from three of its seven blocks.

Vedanta, the operating unit of London-listed mining and energy group Vedanta Resources Plc, is also considering merging another listed cash-rich subsidiary, Hindustan Zinc Ltd.

Vedanta Ltd, previously known as Sesa Sterlite Ltd, owns 64.9 per cent stake in HZL, which has USD 4.8 billion of cash.

Government holds 29.5 per cent in HZL.

Out of Vedanta Resources’ gross debts of USD 16.7 billion as on March 31, USD 5.7 billion comes up for repayment before March, 2017.

Debt-burdened Vedanta began simplifying its byzantine structure with a 2012 overhaul.

In 2013, Agarwal had consolidated iron ore mining business by merging Sesa Goa Ltd with Sterlite Industries (India) Ltd, which ran copper and aluminum businesses.

Vedanta Resources also transferred its 38.8 per cent holding in oil producer Cairn India, including a debt of USD 5.9 billion, to the new company.

Jalan said, of the debt at Vedanta Resources, USD 400 million is coming to repayment this year, for which refinance has already been tied up.

Another USD 2 billion is due for repayment in June/July next year and the group is in advanced stage of talks with banks.

“We are evaluating which is the most cost effective option to reduce cost and enhance maturity profile,” he said.

Asked about merging Hindustan Zinc with Vendata, Albanese said it could happen only if the Government of India decided to divest its shares.

“If government chooses to divest we would welcome that decision. We would look forward to participation in the divestment, whether through auction or any other process,” he added.

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